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Hurricane Hermine, the first hurricane to hit Florida in more than a decade, blew through the eastern border and into the Gulf of Mexico over the course of more than a week.
It started in late August and lasted through early September as market price speculation caused the NYMEX Commodity Futures National Average Natural Gas Prices to rise and fall during that timespan, but it started to rise again afterward. According to workboat.com, in preparation for the hurricane, oil rigs in the Gulf of Mexico were evacuated and shut-in procedures were enacted, which resulted in “approximately 15 percent of the current oil production in the Gulf of Mexico [being] shut-in,” with “roughly 9 percent of natural gas production” shut-in as well.
With these kinds of effects on natural gas production, would areas like Ohio be affected by these production shut-ins or any kind of major disaster hitting the area?
“There’s no weather event that’s going to create that type of volatility,” said Tim McNutt, Director of Commercial Operations for Dominion East Ohio. “It’s hard to come up with a natural disaster that’s going to create a supply interruption on a scale that’s going to cause price volatility.”
For being near the natural gas-rich Marcellus and Utica shales, McNutt said areas — such as Ohio, Pennsylvania, West Virginia and the Appalachia region — around these shales are very secure when it comes to natural disasters affecting natural gas prices or supply.
“With the amount of supply and the amount of locations [producers] have where they have proven reserves of natural gas, it’s hard to imagine a scenario where we’re going to get an extremely short supply and a significant upward volatility,” he said.
With the event of natural disasters that be predicted, such as Hurricane Hermine, they could influence prices based off speculation alone. These are what Ralph Talmage, chairman of Northwood Energy Corp., calls short run price speculation.
“Perception is the gas market’s price in the short run,” he said. “You’ll have something like a hurricane, a pipeline blowing up or you have something like an international recession or some sort of thing happen and it can affect prices quite dramatically in a very short period of time. But then it gets back to reality and toward a shift in supply and demand.”
McNutt said through the shale revolution — which involved technological advances with horizontal drilling and fracking — areas near the Marcellus and Utica shale regions were able to combat outside events from affecting local natural gas prices significantly. With this, he said these areas are more resilient to price volatility because of the abundance of natural gas that’s available to drill and left in reserve.
“Our pricing was significantly impacted by hurricanes in the Gulf of Mexico [in the past] because a lot of our supply came from there,” he said. “We get so much of our supply coming from Utica and Marcellus development that we probably hardly saw any volatility at all with the hurricane here in Ohio.”
McNutt said there aren’t many significant natural disasters or weather patterns that could affect natural gas supply or production. For areas near the Marcellus and Utica shales, disasters such as a tornado would “take out a really small area in the big picture of things” and even if there was a “crazy earthquake,” he said there’s “not a history” of that possibly happening.
McNutt said one of the major determining factors that would put significant pressure on prices in natural gas-rich areas would be through legislation that would limit or ban fracking.
“You cannot drill and commercially produce any wells without hydraulic fracturing,” he said. “Effectively, if they shut hydraulic fracturing down, you’re not going to have any wells drilled. That’s what you have in New York right now: there are no wells drilled in the whole state right now because they have a ban on hydraulic fracturing.”
According to Bloomberg.com, the state of New York banned fracking in Dec. 2014, as the decision was “hailed by environmentalists and derided in the economically depressed Southern Tier region.” Talmage said with states like New York and New Jersey, which “use a tremendous amount of natural gas,” they can be susceptible to price volatility because of their lack of “pipeline capacity to get more gas.”
“A lot of times they have to interrupt business and pull their storages as far as they can and try to force as much gas that way as they can,” Talmage said. “If you need to buy some gas on the spot market to cover your shortfall, you’ll have to pay through the nose for it. Unfortunately, producers like me can’t take advantage of it because we don’t have the contracts for transportation. We’re limited to the number of bigger companies who can do something like that because they have the stuff in play, can get ahold of gas and also get it there.”
For now, in Ohio, Talmage said natural gas prices will continue at low prices because of the large amount of supply available.
“Gas will slowly ratch up in the future but there’s not going to be anything dramatic,” he said. “It’s going to be down for a long time. There’s so much good horizontal drilling acreage you can do in the country.”
McNutt said areas like Ohio are less susceptible to price volatility, but Talmage said prices are going “very depressed” and will continue to “stay depressed.”